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The ratings are in. Americans love TV--and they hate their cable
providers with the white-hot intensity of a thousand suns. Gripes
ranging from annual price hikes to technical snafus to
restrictive bundled packages continue to relegate cable companies
to the cellar of consumer experience surveys: In a study by
research firm Temkin Group that ranks the customer service of 235
companies in 19 industries, TV service providers occupy six of
the seven bottom spots.

Chet Kanojia feels subscribers' pain. "Media consumption is
changing and evolving, but there hasn't been a whole lot of
technological progress and innovation around the cable customer
experience and around billing," he says. "Consumers feel like
they're still stuck in an era where they're not being heard."

Aereo, the startup Kanojia launched in
2012 in New York City, turns the conventional broadcast model
on its head by enabling consumers to stream live and
time-shifted TV programs to internet-connected devices--no
boxes, cable subscriptions or complex wires required. The firm
assigns each user a dime-size remote antenna and cloud-based
digital video recorder, billing $8 per month for 20 hours of
DVR space. For an additional $4 per month, Aereo customers can
upgrade to 60 hours of space and the flexibility of recording
two shows at once.

"Our ambition as a company is offering a better way for people to
consume television and media," says the soft-spoken Kanojia,
Aereo's CEO. "We're getting a lot of positive reaction because
we're enabling an alternative. There is a vacuum in the
marketplace that the incumbents aren't coming in to serve."

As of press time, Aereo services were limited to a dozen major
U.S. cities, with grab-bag programming lineups determined by
which signals are available in each market. But despite Aereo's
relatively small scale, major broadcasters are mounting an
all-out offensive to neutralize the threat it poses. Almost
immediately after Aereo went live, a consortium of TV giants
filed an injunction against the service, including CBS, Disney's
ABC, Fox and NBC, whose parent Comcast will have even more skin
in the game if its bid to acquire Time Warner Cable is
successful. The networks contend that Aereo, which doesn't pay
for the over-the-air broadcast signals its solution captures,
violates copyright law and essentially steals their programming.
(The broadcasters declined to comment on the recommendation of
counsel.)

Aereo is winning the battle, at least so far. In mid-2012, a U.S.
District Judge denied the networks' joint injunction, citing as
precedent the landmark 2008 case The Cartoon Network v. CSC
Holdings, Inc. (aka Cablevision), which determined the
legality of cloud-based streaming and DVR-based services. The
networks appealed the decision to the U.S. Court of Appeals for
the Second Circuit, which in April 2013 upheld the lower court's
ruling and stated that Aereo's one-to-one streaming technology is
not tantamount to a public performance and therefore does not
constitute copyright infringement.

Last October, the broadcasters petitioned the U.S. Supreme Court
to take up the case. One month later, both the National Football
League and Major League Baseball filed a joint amicus brief in
support of their broadcasting partners, with the two leagues even
threatening to shift their games from free TV to premium cable,
"where Aereo-like services cannot hijack and exploit their
programming without authorization." The Supreme Court agreed to
hear the case; a ruling is expected by the end of June.

"I'm not an attorney, but I can tell you that Aereo has gone to
extraordinary lengths to craft a service that, to my eyes, stays
within the law and what is decided fair use," says Colin Dixon,
principal analyst at Silicon Valley analysis firm nScreenMedia.
"This is a very, very important case, because if the justices
find [that Aereo's streaming service] is a broadcast, it calls
into question the Cablevision decision. It will also call into
question other cloud services, as well as all infrastructure for
delivery of all media over the internet."

Chaitanya "Chet" Kanojia has spent the better part of his life
dreaming up technologies with the potential to change the TV
industry. As a teen in Bhopal, India, he began his
entrepreneurial career building bookshelf speakers in his
parents' garage, selling them for less than the price of
name-brand gear. He also hatched a never-realized scheme for a
primitive video-on-demand system employing VCRs. "I tried to
convince my mom to give me the money to start that. Wisely, she
said no," the 43-year-old chuckles.

Kanojia drew formative inspiration from computing pioneers like
Bill
Gates and Steve Jobs.
"The most attractive part is that they weren't born into it. They
went from two guys in a garage to empires," he says. "India is a
pretty brutal place. There's a lot of poverty and a lot of feral
dogs running around. My father and I would go out for walks, and
he would always say, 'You know, that dog can feed himself. The
challenge in life isn't feeding yourself. What's important is
what you create.'"

After earning his bachelor's degree in mechanical engineering
from the National Institute of Technology in Bhopal, Kanojia
immigrated to the U.S., attaining a master's degree in computer
systems engineering from Northeastern University in Boston. From
there he joined Product Genesis, a strategic innovation
management services firm spun out of the Massachusetts Institute
of Technology. "That's where I learned about product
development--how you manage the process, how you allocate
resources and all sorts of other skills," Kanojia recalls.

That experience proved instrumental when Kanojia founded Navic
Networks in 1999. The Waltham, Mass.-based business's software
helped cable companies with issues like spectrum planning and
viewer measurement, which aided them in infrastructure management
as well as rolling out targeted campaigns. Navic raised roughly
$43 million from investors including Pequot Ventures (now
FirstMark Capital), Himalaya Capital, Highland Capital Partners
and Pilot House Ventures before Microsoft acquired the business
in 2008, forking over between $200 million and $300 million,
according to reports.

Kanojia stayed with Microsoft for just over two years but itched
to return to the startup space, eventually discussing the Aereo
concept with FirstMark managing director Amish Jani. "I remember
the dialogue vividly," Jani says. "Chet said, 'I've got this
idea. I've tried to shake it. It's so crazy, but it's so elegant,
and I think it can be a game-changer.' We would have backed
almost anything he came up with because we thought so highly of
him, but we spent a lot of time working through it and basically
decided this thing was crazy enough that it just might work."

Working with Joe Lipowski, who became Aereo's CTO, and a team of
software and hardware engineers, Kanojia began designing the
remote antenna at the core of his solution, completing a
functional prototype in 2011. The team next tackled how to
transcode MPEG-2 on ATSC to the H.264 internet video standard at
wire speed on a consumer-by-consumer basis, a challenge that
stretched another six months. In all, Aereo spent roughly $50
million on R&D, finally becoming commercially available in
September 2012.

While Aereo engineers toiled away, Kanojia visited every network
broadcaster and many cable companies to discuss the venture. "We
told them what we intended to do," he says. "We said, 'We think
we're right about this stuff. If you've got an issue, we should
talk about it, and maybe we can come to a resolution.' Not a
single person said, 'We have a problem with this.'"

Kanojia publicly unveiled Aereo in February 2012, buoyed by $20
million in financing from backers including FirstMark, Highland
Capital and IAC, the media and internet company led by Hollywood
power broker Barry Diller, who spent close to a decade as Fox
chairman and CEO. The networks filed their injunction just two
weeks later.

A source familiar with the case says that broadcasters fear Aereo
could undermine the lucrative retransmission fee structure
imposed by 1992's Cable Television Consumer Protection and
Competition Act, which requires cable providers to reimburse
networks for carrying their content. Retransmission fees
generated an estimated $3.3 billion in broadcaster revenue in
2013, a total research firm SNL Kagan projects will increase to
$7.6 billion by 2019. The networks don't just object to Aereo
redistributing their programming while circumventing those fees;
they believe cable and satellite operators could follow Aereo's
lead, causing a seismic shift that would endanger their bottom
line.

"In some respects, Aereo actually helps broadcasters,"
nScreenMedia's Dixon counters. "One aspect of their business is
advertising sales, and Aereo increases eyeballs. It's that
simple. The problem is that broadcasters are also getting a
substantial amount of cash from pay-TV operators. The
broadcasters are not scared of Aereo per se; it's the approach.
Because if that approach is OK, then potentially pay-TV operators
could say, 'We're just going to do Aereo for our local broadcast
stations, and we're not going to pay [the networks] anymore.'"

The case now before the Supreme Court, American Broadcasting
Companies, Inc. v. Aereo, Inc., isn't simply about Aereo and
its broadcaster opponents. A decision to block Aereo could
jeopardize the cloud-computing and cloud-storage segment as a
whole, potentially blocking consumers from saving and accessing
content via digital locker services like Apple's iCloud, Amazon
Cloud Player and Google Play Music.

"People confuse the issue and say, 'Aereo doesn't pay for
content,'" Kanojia says. "Well, the consumer has the right to
that content for free, using an antenna. That's what Congress
said. That was the deal with broadcasters. The cloud [is] the
real fight. If you stop Aereo, you're basically saying that every
time you move a file from location A to location B, you have to
pay a performance tax on it. This is not limited to performances,
either--it also applies to e-books and everything else across the
board."

If the Supreme Court rules against Aereo, the justices would
effectively overturn the 2008 Cablevision decision and make
cloud-based DVRs illegal, "in which case we have to change that
architecture and revert back to putting DVRs in people's homes,"
Dixon explains. "Then I start to really worry about cloud storage
for consumers. The ability for me to rip a CD, put that content
on a cloud-storage device and listen to it on my iPad or
smartphone when I'm wandering around--that behavior may be in
question."

And if the Supreme Court rules in Aereo's favor? 21st Century Fox
president and COO Chase Carey will consider transitioning Fox to
a subscription service, and other networks could follow suit.
Dixon says that scenario would likely take a long time to play
out, however, citing a multitude of contractual hurdles.

"Maybe nothing happens," Dixon adds. "One of the broadcasters'
fears is that pay-TV systems will use Aereo's structure to avoid
paying them license fees. The problem with that scenario for
pay-TV providers is that NBC, CBS and Fox provide a lot of
additional cable channels for those systems as well. They could
say, 'Be careful--if you do this, I'm going to pull all of my
channels from your service.'" (This is not an idle threat: Time
Warner Cable lost a record 306,000 subscribers in the third
quarter of 2013 following a monthlong skirmish that blacked out
CBS and CBS-owned cable outlets Showtime, the Smithsonian Channel
and CBS Sports.)

Only the Supreme Court knows what comes next. For now, Aereo must
play the waiting game. The company plans to expand to additional
U.S. markets by the end of 2014; Kanojia is also plotting new
features and enhancements. While Aereo has not yet revealed
subscriber totals or revenue, investors remain bullish on the
company's prospects: In early January the firm closed a Series C
financing round of $34 million, bringing its total funding to
close to $100 million.

Kanojia says he can't--scratch that, won't--envision a scenario
in which Aereo does not prevail. "I wouldn't get out of bed if I
was thinking along those lines," he says. "Consumers want this,
the system will be better, and we are bringing innovation into
the industry. We're on the side of the angels."